Bankruptcy rulings favor Stockton

SACRAMENTO - A federal bankruptcy judge ruled in Stockton's favor Wednesday on two issues, first giving the city the OK to spend $1.9 million to buy four new firetrucks.

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By Scott Smith

recordnet.com

By Scott Smith

Posted Jan. 31, 2013 at 12:01 AM

By Scott Smith

Posted Jan. 31, 2013 at 12:01 AM

» Social News

SACRAMENTO - A federal bankruptcy judge ruled in Stockton's favor Wednesday on two issues, first giving the city the OK to spend $1.9 million to buy four new firetrucks.

Creditors didn't object in a Sacramento courtroom upon hearing that half of the city's fleet of 16 engines are so old that a mechanic follows them to emergency calls in case of a breakdown.

But U.S. Bankruptcy Judge Christopher Klein next heard nearly three hours of arguments before ruling that Stockton has the authority to settle a lawsuit without his permission.

"It's a very interesting, tricky question," Klein said, ruling from the bench.

The question arose when Stockton sought to settle a lawsuit filed by a man named Christopher Hallon, who accused police of beating him up in 2010. The city agreed to pay Hallon $55,000 and he would drop the suit.

That relatively small amount of money has large implications. The city has a long list of other lawsuits that it may now begin to resolve.

The city's lead bankruptcy attorney, Marc Levinson, said the federal judge has no say in how the city spends its money or makes political decisions.

James Johnston, an attorney representing Franklin High Yield Tax Free Income Fund, said he wasn't concerned specifically with Hallon's settlement.

He and other Wall Street creditors fought the settlement on principle, fearing that the city would be free to pay off favored creditors in full and in bankruptcy short others it disliked, such as the bond holders.

Franklin, Assured Guaranty Corp., National Public Finance Guaranty Corp. and Wells Fargo, sought to force the city to bring its settlements into court, where the creditors could also have a say before a judge.

"This is a two-way street, not a one-way street," Johnston said. "Creditors are entitled to be heard."

Yet in his ruling, Klein drew the limits of his own powers to dictate how the city spends its money and makes political decisions. Klein said he will ultimately decide on the Hallon settlement and others in Stockton's plan of adjustment, or how Stockton ultimately structures its debts.

Only then will he have authority under the U.S. bankruptcy laws to rule if Stockton treated all of its creditors in "good faith," as the city is required, Klein said.

"The price may very well be that on the day of adjustment, I might say, 'Sorry, I'm not persuaded,' " said Klein, who will later publish a written decision.

In this process, Klein said he may at first reject Stockton's plan of adjustment, and make the city come back to present a different version until he finds one that is acceptable.

Michael Gearin, an attorney for the California Public Employees' Retirement System, which manages Stockton's pensions, also made arguments, largely mirroring the city's position.

CalPERS' General Counsel Peter Mixon observed the hearing and said afterward that he was pleased with the judge's ruling. The judge recognized that Chapter 9, which applies to municipalities, is different from corporate bankruptcy law, Mixon said.

Levinson said that the judge correctly read the bankruptcy laws.

"The city runs itself," Levinson said. "Now the city is going back to the business of running the city."

It has been seven months since Stockton filed bankruptcy. The city next must convince the judge that it is eligible for bankruptcy protection, which creditors oppose. A hearing on that is scheduled for Feb. 26.